Recently the Consumer Financial Protection Bureau (CFPB) released a much anticipated rule that finally gets the ball rolling on reform of the mortgage finance industry. Investors fled the market following the housing bust, reducing the flow of financing to borrowers. Likewise, many homebuyers were sold mortgage products that were untenable, resulting in damaged credit and lost savings. Transparency, verification and documentation are keys to restoring confidence from investors and homebuyers. The majority of the market will benefit from the new QM rule, but a subset of the market will likely face higher prices or lose access to financing all together.
The Qualified Mortgage rule, or QM, lays out basic requirements for lender underwriting. In short, the originator of the loan must verify all sources of income and assets and verify that the borrower has the ability to repay the mortgage (ATR). A number of loan types are prohibited from receiving the QM statu,s including those with negative amortization (balloon payments), interest-only features, as well as those with durations greater than 30-years. Finally, there is a cap on fees that lenders can charge of 3% (with an exception for loans under $100,000) and the back-end debt to income ratio (DTI) must be less than or equal to 43%.
Each month, the National Association of REALTORS® gathers up-to-date and on-the-ground incisive comments from REALTORS® who participate in the REALTORS® Confidence Index (RCI) survey. The RCI survey tracks expectations about overall market conditions, buyer/seller traffic, price, buyer profiles, and issues affecting real estate. The November 2012 survey was conducted during November 26 through November 30, 2012. All real estate is local and conditions in specific markets may vary from the national trend.
One of the major concerns is the tight credit conditions. Access to financing remains difficult, benefting cash buyers, and the process remains protracted, causing delayed closings and risking cancellations. There are reports that banks are asking for higher credit scores, with a report of a bank rejecting a score of as high as 800. There is also lack of assistance for helping current homeowners who are slightly delinquent to modify keep their homes. Here is what REALTORS® are saying:
- Financing taking too long (underwriting/processing with a radical amount of multiple review creating a back log) which results in confusion in the final days leading up to closing.
- Lenders are not making closing dates. 45-60 days are being given per contract and we are seeing as much as a 2 month delay in closings.
- The mortgage industry is continuing to be in a difficult process. They are taking the process to the extreme and even offending strong buyers with credit scores in the 800′s.
- 35% of my buyers contracts have been terminated due to lenders and underwriters changing qualifications in the process, and buyers losing money for inspections and appraisals
- Lender are being more aggressive (in a good way) working with Short Sales. They need to be more aggressive with Loan Modification.
Recently released government data for 2011 from the Home Mortgage Disclosure Act (HMDA) shows just how tight mortgage credit has been. Incomes of prospective purchasers have increased since 2004, but the loan to income ratio has declined. The median household income for a homebuyer using conventional financing rose from $79,000 in 2007 to $ 90,000 by 2011, while the national median household income has remained flat since 2007 at about $50,000, This indicates that either 1) more loan applicants with higher incomes were applying and those with lower incomes were self-selecting themselves out of the process, and/or 2) that banks income standards had become more stringent.
The delinquency rate measured 12 months after origination has improved dramatically on mortgages backed by Fannie Mae and Freddie Mac. According to the FHFA’s first quarter report on the enterprises, the 12-month delinquency rate is now back to 2002 levels even though the unemployment rate is significantly higher than it was in 2002 and price growth was stagnant until this spring. Weak equity growth and high unemployment are the main drivers of delinquencies suggesting that the rates in 2002 and 2003 would have been much higher if similar home price and employment trends had been present.
Likewise, the delinquency rate on loans financed by the FHA 12 months after origination has fallen dramatically since 2007.
The heads of all three banking regulators, the Federal Reserve, OCC, and the FDIC, have made comments alluding to the need for more relaxed lending standards that are in line with sound underwriting. Yesterday’s announcement by the FHFA that it intends to cap the time frame for reviews of problem loans on new originations may help to relax the put-back and reputation risk to lenders going forward, but risks to lenders from the rebuttable presumption stipulation of the qualified mortgage rule and risk weights on high LTV loans under Basel III could mitigate this effort.
Just How Big is the FHA?
The FHA has been in the headlines a lot recently. So have assertions regarding how large of a presence the institution has in the housing market. The FHA’s significance varies based on which benchmark you are measuring it next to; the total sales market, the purchase mortgage market, or the mortgage insurance market. But by whichever measure, the FHA’s role is on the decline. Regulatory changes to the secondary market must first take place, though, for the FHA to withdraw to its historic position.
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